Modes of Buy-Back of Shares
Modes of Buy-Back of Shares
The concept of buy-back is precisely what its term indicates – the repurchase of shares from existing shareholders. These shares are normally procured at a price which is higher than the market price. Transactions of such nature enable companies to make appropriate investments as the reduction in the number of shares outstanding enhances the proportion of a company’s shares. This article explores the various modes of buy-back of shares.
Purpose of Buy-Back
The practice of buy-back is carried out for the fulfilment of any of the following objectives:
- Improving net earnings per share.
- Improving return on capital.
- Improving return on net worth.
- Enhancing the long-term shareholder value.
- Enhancing the consolidation of stake in the company.
- Nullifying inappropriate bids for a takeover.
- Refunding the receipt of surplus cash to shareholders.
- Deriving an optimum capital structure.
- Supporting the share price in the event of sluggish market conditions.
- Efficient servicing of equity.
Modes of Buy Back
The practice of buy-back is pursued by making use of any of the below-listed methods:
- Buy-back from existing security holders – on a proportionate basis
- Buy-back from the open market – on the stock exchange (for listed companies)
- Buy-back from the open market – through book-building (for listed companies)
- Buy-back from employees – sweat equity and stock option
Each of the above-mentioned modes is dealt with in detail below.
Buy-back from Existing Security Holders – on a Proportionate Basis
This mode of repurchase is performed through a tender offer, wherein a company proposes to buy back shares/securities sold earlier at a fixed price through a letter of offer from the holders of shares/securities of the company. Here, the company is required to make a fund allocation based on the fixed price and deposit a specified portion of money in a designated escrow account. The buy-back offer under the tender route is valid for a maximum period of thirty days from the date of initiation of the offer.
The SEBI (Buy Back of Securities) Regulations, 1998, establishes the following mandates with respect to this provision:
- Bifurcation of shareholders into two categories, namely general and reserved.
- A reservation of 15% of the buy-back offer size for reserved category small shareholders.
- Minimum entitlement to each shareholder based on the ratio of buy-back.
Note: Small shareholders are those shareholders, whose market value does not exceed INR 2 lakhs on the record date.
Buy-Back from the Open Market – on the Stock Exchange (for Listed Companies)
This mode of stock procurement is valid for six months from the date of initiation of the offer, thereby facilitating the flexibility of repurchase of shares at the desired price levels. The latest amendment of SEBI regulations provides for the utilization of at least 50% of the amount allocated for re-procurement.
To pursue re-purchase in this mode, the company is obligated to create an escrow account towards security for the performance of its obligations under this provision.
Companies non-compliant with the utilization of earmarked funds as specified above will be forced out of the escrow account by the merchant banker. However, the following circumstances may not result in the forfeiture of an account:
- The Volume Weighted Average Market Price (VWAMP) of the shares of other specified securities of the company during buy-back, as certified by the merchant banker, is higher than the buy-back price.
- The sale orders of a company are inadequate despite the buy orders placed by the company (requires the certification of the merchant banker).
- The concerned circumstances were beyond the control of the company and deserve consideration.
- A separate window shall be created by the stock exchange, and the same shall remain open during the buy-back period to facilitate the buyback of shares or other specified securities in physical form.
- The company may go on with the repurchase of shares or other specified securities from eligible physical shareholders holding physical shares through a separate window post verification of the identity and address proof by the broker.
- The price at which the shares or other securities are repurchased will be deemed the VWAMP of the shares or other specified securities repurchased during the calendar week in which the shares or other specified securities were repurchased.
- The price or other specified securities tendered during the first calendar week of the buyback shall be the VWAMP of the shares or other specified securities of the company during the preceding calendar week.
- If no shares or other specified securities were repurchased in the normal market during the calendar week, the preceding week of purchase may be considered for the determination of VWAMP.
Buy-Back from the Open Market – Through Book-Building (for Listed Companies)
Under this mode, the price of the buyback is determined by the merchant banker based on the bids submitted by the investors. Promoters may participate in a buy-back through a tender offer and from open market through book-building. The final price shall be remitted to the shareholders whose shares have been accepted for buyback.
- The final price refers to the highest price which is accepted.
- The process of book-building entails the generation, capturing, and recording of investor demand for shares during an Initial Public Offering (IPO) so as to support efficient price discovery.
Buy Back from Employees (Sweat Equity and Stock Option)
This mode is considered apt for the purchase of securities issued to employees of the company who are in pursuit of a scheme connected with stock option or sweat equity.